Aalborg Forsyning has announced that the supply temperature in the heating network must be lowered from 65 to 60 degrees over the next 5 years. The university has therefore decided that all teaching rooms and group rooms in the center of Aalborg must be post-insulated and have new heating installations. We start from your own group room: The heat consumption (district heating) in the group room is already 3000 kWh / year and the heating price 0.4 DKK / kWh. Replacement of windows and post-insulation of walls as well as new radiators cost a total of DKK 5,000 per group room. This will result in an annual saving in heat consumption in your group room of 1250 kWh. We assume that the renovation will last for 15 years (= the maturity of the investment). AAU will take out a loan to complete the project. What maximum interest rate would you recommend that AAU accept in order for the investment to make a minimum return? Justify your recommendation. (It is recommended that you use the present value formula.) How many years should the renovation last at least if AAU is offered an interest rate of 7.5%? Justify your answer.

New comment:

The temperature in the heating system will be lowered from 65 degree to 60 degree over the next 5 years.

The university have decided to isolate the group room and have a new heatinginstallation.

The heating in the group room is now 3000 kWh/year and a price of 0,4 euro/kWh.

To isolate the group room cost 5000 euro.

This will give a saving of 1250 kWh yearly.

The isolating will last for the next 15 years (=the maturity of the investment).

The university will take a loan to make this project.

What maximum interest rate will you recommend accepting, so the investment as a minimum can earn itself home.

Explain your recommendation

How many years should the investment as a minimum last, if the university gets a interest rate on 7,5%

Explain your recommendation